Uwe Reinhardt: We are not 'off the hook' on costs

Uwe Reinhardt is a Princeton health-care economist, a longtime member of the Institute of Medicine and a frequent contributor to the New York Times Economix blog. I spoke to him earlier today about the cost controls in the bill.

The CBO says this bill will save more than a trillion dollars. Should we believe them?

Well, the CBO’s numbers, these poor guys have to guess, and this is the best they can do with a messy bill. By and large, this bill tries to pay for itself, and a little bit more. They’re carving out $500 billion from Medicare. There are genuine, real taxes on high-income people, particularly the broadening of the tax base for Medicare.

When you think about cost, there are two questions: What does it do to the deficit, and what does it do for national health spending? The bill does not necessarily do much for national spending. But it puts in the architecture that would make it possible, if we wanted to have cost containment, to do it rationally. That’s the program on bundling payments, the research on comparative effectiveness and the Medicare Commission. All of that needs to be done. And if it is done, this bill makes it possible for someone willing to control costs to do it and have the evidence to defend it.

This argument that the bill is a start on cost control – is it an argument or a rationalization? Do you need to build this infrastructure before you control costs, or is this just putting the hard decisions off till later?

I think it’s necessary. When McAllen, Texas, became the poster child for high spending, suddenly the Wall Street Journal jumped out to say that it’s spending was justified! The only way to answer that is to have the really good research to say this isn’t justified. So we need this research to be able to tell Miami that they’re not going to get three times as much as Minnesota in the future. At the moment, we don’t have the evidence to make that case.

Health-care reformers say that you can’t get reform if you slap the providers in the face. They have to buy in. If you tried to do what the Clintons did and tell hospitals and doctors that this reform will make them poorer, that’s the kiss of death. Even the pope couldn’t cut health-care costs in the short run. It’s a 10-year strategy.

How about the cost controls on the insurance side? Things like the exchanges, the excise tax. Are you optimistic this will work?

I’m very optimistic on the exchanges. Think of how insurance is sold. Some insurers say they need to burn 40 percent of their premiums on administration and advertising and brokers. Imagine telling another country that America’s insurers need to be able to burn 40 cents of every dollar. That’s going to end in the exchanges. And that will save a lot of money.

And the excise tax?

There’s an assumption that that will move people out of such generous policies and increase take home pay. I’m an economist. When I teach students, I believe this stuff. But I have my doubts that it will work. I would have liked to see a tax on the place of work rather than the insurers. I would have said if you make less than $75,000, you don’t pay any tax. If you make between $75,001 and $199,999, you pay taxes on some of the insurance. And if you make above $200,000, the whole thing is taxed.

So what comes next? If this is the first step, what should the second step be?

This thing will not get us off the hook cost-wise. But it’s a bit like moving into a house. You’ll spend another half year having workmen come fix the house. The individual mandate, for instance, is not good enough. You could still have young people pay the fine, and you’ll get the death spiral. I think they should have a window, if you enroll now, you’re in the club. But if you don’t enroll now, if you decide to play the adverse risk selection game, then if you try to reenroll, you can be discriminated against for health status.

"The individual mandate, for instance, is not good enough. You could still have young people pay the fine, and you’ll get the death spiral.'

Not just young people. Not as long as insurers are required to provide the same benefits to everybody, whenever they want to enroll, whether they are sick or not. And especially if the mandate goes to the government, which it will, instead of to insurance companies to defray the expense of guaranteed issue and community rating.

@ bgmma50: Adverse selection can be dealt with by the solution that Reinhardt suggests or by having a 6 or year waiting period to get insurance once you go naked for a time. WE do have 4 years to work these items out before the mandate comes into effect and the exchanges are set up. There are answers to the death spiral problem if you would take off the anti-obama specs and open your eyes.

"I’m very optimistic on the exchanges. Think of how insurance is sold. Some insurers say they need to burn 40 percent of their premiums on administration and advertising and brokers. Imagine telling another country that America’s insurers need to be able to burn 40 cents of every dollar. That’s going to end in the exchanges. And that will save a lot of money."

I thought Uwe was supposed to be an expert. Can he name one managed care company that has a medical loss ratio of 60%?

"Adverse selection can be dealt with by the solution that Reinhardt suggests or by having a 6 or year waiting period to get insurance once you go naked for a time. "

Oh, I'm very well aware that it CAN be dealt with. I've advocated all along for Reinhardt's solution. It's called limitation of coverage for pre-existing conditions. And anybody who opts out or fails to maintain continuous coverage ought to be subjected to it. But the Democrats have chosen not to deal with it, despite thousands of pages of legislation dealing with far less significant issues. Now why do you suppose that is?

But I will add elimination of the individual mandate to the list of amendments that Republicans should propose for reconciliation. Very catchy sounding, and mitigates much of the constitutional problems as well. Then the House Democrats can choke on the reality that there's only one way to prevent the death spiral and that's through denial or limitation of coverage for preexisting conditions. Now that would be fun!

"or by having a 6 or year waiting period to get insurance once you go naked for a time"

Great solution srw3!! I feel that the solution Reinhardt mentioned was a little too draconian (irreversible exclusion from the protections against risk rating if you miss the sign up period?)

Like srw3 points out the bill as it stands is not set in stone - if some aspect of the legislation (like the individual mandate penalties) is not working 100% as envisaged then we improve it!

One of the best things about achieving near universal coverage (other than the incredible moral reward) is that it gives the country a much greater stake in fixing our system, now that the insidious release valves of recission, risk rating and growing numbers of people priced out of the market have been closed.

Summarizing, the first answer -- the answer to the question "The CBO says this bill will save more than a trillion dollars. Should we believe them?" -- was "no".

The answer to the question "And the excise tax?" was "There’s an ASSUMPTION that that will move people out of such generous policies and increase take home pay."

And the conclusion was "This thing will not get us off the hook cost-wise."

In short, a consumer can roll the dice. By trusting in the Exchanges, a consumer might wind up with lower costs... or might wind up with nothing. If Pelosi has been honest, savings should be seen in the next few months: numerical analysis, from Princeton and elsewhere, should prove interesting.

@srw3: "Adverse selection can be dealt with by the solution that Reinhardt suggests or by having a 6 or year waiting period to get insurance once you go naked for a time. WE do have 4 years to work these items out before the mandate comes into effect and the exchanges are set up."

What possible reason could there be to wait? What conceivable reason would there be to not make that part of the bill right now? What you're saying is exactly what many critics of this bill have been saying, the Democrats want to do the easy part (expand coverage), and put off all the hard parts for later. It's ridiculously disingenuous, "Trust us, we'll do all this painful stuff that people will hate at some unspecified time in the future."

I have made multiple comments on this blog, directed at you, regarding the death spiral, and you have, more than once, dismissed out of hand my concern. So why the change of mind?

So we have four years to fix the problem. And what makes you think a future Congress, one with a Republican majority in the house, will be willing to fix the problem when the current Congress was unwilling to. And this despite the deep concerns expressed by dozens of economists on the issue. Frankly, we are screwed.

oh with all due respect i totally disagree on his take on the excise tax. Taxing it solely based on income (and not on the level of benefits they consume) is absolutely wrong to me and won't realize the needed effects.

Reinhardt is all about penalizing low income Americans to get them to do what he wants. The excise tax: sure it will work. Make people forgo care because they can't afford it. The individual mandate: tighten the noose. Stigmatize people who pay the penalty as much as possible, without knowing their stories. That's not progressiveI anticipated how this would play out--that's why I strongly opposed this bill.

Sometimes I think commenters on this blog just come here to b*tch about the fact that legislation is not perfect, or that their preferred HCR solution was not adopted, and prognosticate that the world is going to end...

The fact of the matter is that we live in the real world, and in the modern American congress, and body politic, and media environment a perfect solution (hell - any transformative solution) did not have a political snowball's chance in hell of passing. There is really no point in harping on that the bill is not perfect - everyone who has been observing the last year or two of horse trading knows that (including, I am 100% sure, the authors of the legislation!)

That being said the bill that has passed is incredibly comprehensive and ambitious, even if it is incremental. It finally gets us moving decisively in the right direction! It has dozens of potentially cost saving measures in it, and it builds a marketplace that could be the place Americans buy their healthcare in the future... and all of that without fundamentally upsetting anyone's current cushy arrangement and thus condemning the bill to failure. It was quite a tight rope to walk!

Especially given the process it went through to come to fruition there are bound to be many parts of the bill that do not function as planned... and so we will fix them as they arise. At least we will at last have a health care SYSTEM in this country to fix!!!

I do appreciate that people are airing out legitimate concerns, and who knows maybe that will help to show the way forward for health care reform in the US. But to propose that the passage of yesterday's bill was anything but a huge step forward for the country is absurd.

I'm confused by Reinhardt wanting to apply the excise tax only to insurance received by higher earners.

Isn't the point of the excise tax (other than raising funds, directly or indirectly) to help keep the lid on cost pressure? What good does it do if only the top 10%-20% of the population gets hit by it, and the other 80%-90% can run with $30,000 family policies and face no excise tax?

Also, what kind of comment is "I'm an Economist. When I teach students, I believe this stuff. But I have my doubts that it will work"? What? Reinhardt's a very bright guy, so I'll chalk it up to poor choice of words during an interview, but still...

I heard Dr. Reinhardt speak at a trade show about 10 years and have tremendous respect for him as an economist. (I didn't agree with him then and I don't agree with him now). But at least I understand him.

But his take on the excise tax is truly perplexing. His proposal does nothing to put a brake on the overuse of health care.

"I'm an Economist. When I teach students, I believe this stuff. But I have my doubts that it will work"?

Heh - that's pretty funny. What he might be getting at is that in academics people (of neccessity) oversimplify things to try to understand the infinitely complex real world? So then especially in lower level classes the models almost certainly would NOT really work out in the real world as he would teach them...

"I'm an Economist. When I teach students, I believe this stuff. But I have my doubts that it will work"

He should have doubts. 80% of medical costs are for acute and specialty care. How is an excise tax going to help that, without punishing the middle class? And the idea that this will result in higher incomes has been widely discredited by economists who study wages, as opposed to health care economists who don't.

We know what works to control acute and specialty costs: (1) the payer just refuses to pay--something Medicare does and private insurers have been unwilling to do. (2) give the doctors a boss--a senior doctor in their own specialty that forces them to control costs.

And lazza11--calling arguments you disagree with "illegitimate" and "absurd" is a cop-out. Back it up or pack it up.

that memo from Families USA is 2 years old (NJ now has an 80% MLR and is running at 85% in the combined individual and SG markets.

Not only that but it shows no data.

I'm not calling out Mr Reinhardt as kingstuf01 was but I'd love to see some proof of it. Every individual and SG market I've seen while the least efficent (due to the need to explain everything to individuals instead of a single employer group) still meets better MLR's than he suggests.

bmull,

that's naive. If a private payer refuses to pay you have what you all like to call "medical bankruptcy" and insurers get slammed for that.

And doctors don't want to call out other doctors. Its a nice little fraternity.

I agree with your interpretation (hence my comment that he had a poor choice of words). There is definitely more to economics than econ 101. That being said, I'd love to have Reinhart (or anyone) explain how shifting the excise tax from a tax on expensive health insurance to a tax on highly paid individuals does anything from the cost control perspective.

Let's say that we're talking about a gold plated health care package for a corporate CFO that comes out to be $30,000 annually. If that income becomes taxable, then said CFO is probably just going to pay it - the excess burden of the tax might even be added onto his regular comp, who knows. Or consider the health insurance benefits of Goldman Sachs employees. Goldman probably wouldn't let a few thousand dollars worth of extra taxes influence the type of insurance in purchases.

However, when HR makes benefit decisions for the entire firm, an excise tax at the margin for very expensive benefits is likely to push for far less generous health benefits - not necessarily less compensation - perhaps workers see higher deductibles and co-pays but receive across the board increase in wages to make the benefit cuts more acceptable.

Anyway, I'm curious as to how Econ 101 fails in this situation - you'd think that a 40% marginal taxes on comprehensive health packages helps lean against cost pressure in health care. Employers are less likely to provide 'cadillac' plans, and insurance companies have a stronger incentive in negotiations to limit costs. I have an open mind but right now I'm skeptical. In all honesty, this just seems like a roundabout way to making the income tax more progressive

If you have been paying attention to Ezra's writing, and since we are on his blog I assume you have, sums up nicely the reasons that many moderate democrats, and others, are very happy that this legislation has passed - warts and all. It represents a HUGE improvement over the status quo. Like I said in my post above it starts to build a US healthcare SYSTEM for the first time in history, and that is not even to mention the payment reforms, medicare commission etc...

Justin - I don't actually see Dr. Reinhardt's point on the exercise tax either. I can only assume he is looking at it from a social justice standpoint - which really does not help us meet the economic targets the excise tax is designed to address.

I presume the way the excise tax helps controls costs is in the negotiation process. The insurance company knows that if its plans start entering excise tax territory, firms will start facing strong pressure to drop those plans or the insurance company itself might be forced to accept some portion of the tax to stay competitive. So the excise tax suddenly makes the insurance companies who are the least effective at negotiating reimbursements / otherwise controlling costs very uncompetitive at the margin.

I know there is a lot going on - maybe the employer keeps the more expensive plans if the employees like the network, for example, but you'd think that if excess cost growth continues year after year, and that 40% excise tax becomes ever more burdensome, the employees who don't see the doctor all that often will balk.

The excise tax is a blunt object, to be sure, and its probably no where near as effective as capitation would be, but it probably is a nudge in the right direction.

In any case, its hard to believe that the excise tax as currently structured would be less effective at controlling costs than Reinhardt's proposal of only taxing insurance provided to high earners.

agreed. People just don't get how risk averse the average medium size employer is to not only taxes but high premium insurance. You're talking about a high cost plan PLUS a 40% tax. I want to say that there is no revenue gained (ie tax collected) when the report was done.

That being said insurers know how to keep costs down but they can't FORCE people to do it. HSA's. That's all insurers offer to their employees and it helps them keep their costs down. They can only incentivize people with lower premium so much before they don't get the picture. Many HSA's have premiums lower than the MOOP (maximum out of pocket costs). For example, many HSA's in NJ have a premium of say $800 for family coverage while the comparable average plan (not cadillac but average with an in-network deductible) would range around $1500 per month. That savings of $700 per month can't even fully be invested into an HSA and the MOOP on that plan is $8000 for the family. You can't spend that much in benefit and yet still people are hesitant. Another example of why people just don't get it.

justin84: "I presume the way the excise tax helps controls costs is in the negotiation process"--Mainly it encourages the employee to take a cheaper policy, with higher out of pocket costs. The cheaper policies don't reduce the rate of medical inflation. The main drivers of medical inflation are out of the consumer's control. There are some other problems with HDHP's regarding their effect on primary care, integrated care, and cost shifting--but I know visionbrkr loves them and I'm never going to talk him out of it.

I do love them but I understand your concerns too. Currently preventative care is first dollar coverage (with at worst copays) with everything else subject to deductibles.

As we all know people are too seperated from the true cost of care. I get that can be taken to the extreme which is why I've also advocated for setting up HRA's or HSA's like some very large employers do and subject the employee's cost share based upon their income. The higher the income the larger the burden, the lower the income the lower the burden. I think there could be some middle ground we could come to an agreement on that let's people know what it costs without burdening them so much they don't seek treatment when necessary.

I, myself have had two family instances in the past 6 months where I (if I wasn't on an HSA) would have probably run to the ER and cost the system $1000 each visit if I wasn't paying the first share. The key obviously is to know when to make that decision to resolve the issue yourself and when you seek care.

I think you're right initially - people will shift towards less comprehensive plans. Over time, as the average insurance plan rises towards the excise tax threshold, I'd imagine insurers would have more bargaining power. The following may be said more often:

"No, we can't reimburse you at those rates, otherwise based on our expected utilization we'd have to price our premiums above the tax threshold."

Now, there are other things going on (e.g. how essential is it that this particular hospital/doctor is in the network), but insurers might make the decision that no, I'm going to lose too many customers to high premiums and so I'm walking away.

In any case, I agree the excise tax probably isn't the best way to do cost control. Our experience in the 1990s suggests fixed budgets / capitation would probably work better.